Savannah Morning News | MICHAELREKSULAKhttp://savannahnow.com/sms/taxonomy/term/23765/
enFree enterprise: The power of informationhttp://savannahnow.com/exchange/2013-07-26/free-enterprise-power-information
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<p>If we needed a reminder of the power of information, the indictment of SAC Capital Advisors by a grand jury for insider trading was that cue.</p>
<p>The court papers (available at <a href="http://goo.gl/HsmhAF" title="http://goo.gl/HsmhAF">http://goo.gl/HsmhAF</a>) make clear how valuable an information advantage can be in market settings.</p>
<p>Of course, the practices outlined in the indictment are illegal. However, there are many other market interactions in which an information advantage is legal and equally valuable.</p>
<p>Economists have long studied information markets. One textbook example that we all encounter is the “market for lemons.” Sellers of used cars often have more information about their true quality than buyers.</p>
<p>This can — in the extreme — lead to a complete breakdown in trading: Exchanges between buyers and sellers do not happen even though they would be valuable because of the lack of trust.</p>
<p>One way to address such market failures is through government regulations. Many laws in place make it easier for buyers to hold unscrupulous sellers accountable. </p>
<p>However, as private market solutions like Carfax.com have shown, free enterprises can be innovative when it comes to safeguarding the existence of profitable markets. Trust can be built through market solutions that alleviate what economists have termed “asymmetric information” scenarios.</p>
<p>Another great example of how legal “insider” information benefits those “in the know” is research into home purchases when real estate salespeople are looking to buy or sell houses for themselves.</p>
<p>There is a long-running (less than friendly) exchange between the authors of “Freakonomics” and the National Association of Realtors due to the economists suggesting “Realtors are incented to use proprietary information to the disadvantage of their customers.”</p>
<p>They cite research stating that properties on sale by realtors for their own account are on average on the market for 10 days longer than when they sell for others.</p>
<p>Of course, Dubner and Levitt also state: “Don’t be so smug: You probably would too if you were a Realtor” (<a href="http://goo.gl/QXW65t" title="http://goo.gl/QXW65t">http://goo.gl/QXW65t</a>).</p>
<p>Earlier this year, economists published yet another such legal “insider” analysis. </p>
<p>In “Physicians treating physicians: Information and incentives in childbirth,” Erin Johnson (MIT) and M. Marit Rehavi (British Columbia), “compare the treatment of physicians when they are patients with that of comparable non-physicians” (available at: <a href="http://goo.gl/hrtaYg" title="http://goo.gl/hrtaYg">http://goo.gl/hrtaYg</a>). </p>
<p>They find that “physicians are almost 10 percent less likely to receive a C-section” and that “physicians also have better health outcomes, suggesting overuse of C-sections adversely impacts patients health.”</p>
<p>There is, of course, nothing wrong with such better informed “physician patients” or “realtor-sellers” making superior decisions.</p>
<p>What this type of research teaches us, however, is that we should be in favor of, first, market solutions that make information more widely available and, if that fails, some limited regulation with the same goal.</p>
<p>One obvious candidate for such solutions are high-frequency trading practices (currently being probed by the Financial Industry Regulatory Authority). In this case, huge trades are made in fractions of a second to make profits of millions of small trades. That puts “normal” traders at a disadvantage — and it is not clear whether it adds to the efficiency of markets.</p>
<p>Of course, the health-care example above also shows that we are probably correct when we feel disadvantaged while navigating the Babylonian labyrinth of health care insurance here in the U.S.</p>
<p>Sometimes, not having the right information makes one sick to the stomach.</p>
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<p>Dr. Michael Reksulak has taught economics and public finance in Georgia Southern University’s College of Business Administration. He can be contacted at <a href="mailto:MReksulak.SMN@gmail.com">MReksulak.SMN@gmail.com</a>.</p>
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http://savannahnow.com/exchange/2013-07-26/free-enterprise-power-information#commentsExchangeMICHAELREKSULAKBusinessEntertainmentHealthLaborSocial IssuesAdvisorsAsymmetric informationBusinessContact DetailsCorruptionEconomic theoriesEconomicsEntertainmentHealthhttphttp://goo.gl/HsmhAFInsiderInsider tradingLaborMarketMarket failurePerson Email AddressPrivateReal estate brokerSocial IssuesStock marketThe Market for LemonsUN CourtSat, 27 Jul 2013 03:12:53 +0000MICHAELREKSULAK1036553 at http://savannahnow.comFree enterprise: When the economic stakes are highhttp://savannahnow.com/exchange/2013-04-19/free-enterprise-when-economic-stakes-are-high
<p>“The politics in (fill in your profession) are so vicious because the stakes are so low.” This dictum — also called “Sayre’s law” — has been applied to describe many disputes over the last 40 years.</p>
<p>In its most common representation it is applied to “campus politics.”</p>
<p>Of course, any enthusiastic discussions that touch people’s lives and livelihoods should probably not be absorbed under this “low stakes” category. However, many people have fun imagining a professor going in circles for hours debating the most minute of rules regarding how to administrate university life.</p>
<p> Touché. </p>
<p>In contrast to this, research that is performed at our nation’s universities regularly has profound impact on millions of people — and that includes research in economics. One example of how high the stakes can be hit the news cycle this week.</p>
<p>A few years ago, two prominent economics professors at the University of Maryland and at Harvard published a paper about the impact of public debt on economic growth that became enormously influential. (A copy of an early version can be found here: <a href="http://bit.ly/YQtoKx" title="http://bit.ly/YQtoKx">http://bit.ly/YQtoKx</a>.)</p>
<p> Professors Reinhart and Rogoff followed this up with a hugely popular book “This time is different” (<a href="http://www.reinhartandrogoff.com/" title="http://www.reinhartandrogoff.com/">http://www.reinhartandrogoff.com/</a>) which cites the same paper as related research.</p>
<p>The outsize influence of the paper and the book has to do with their direct relevance to public policy discussions in the U.S. and abroad during the last few years.</p>
<p> The authors had concluded that there is a significant relationship between debt to GDP ratios and growth for high levels of debt.</p>
<p>They wrote: “Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies.”</p>
<p>Given the fact that their conclusions made their way into numerous policy documents (and interviews by politicians), it is clear that this research has impacted public policy debates regarding austerity measures profoundly.</p>
<p>Imagine the bombshell, then, when it became known that a replication of their numbers (which started as a class project by a student) appeared to have shown flaws in the underlying analysis.</p>
<p>That study by a doctoral candidate in economics and two professors (made public this week: <a href="http://bit.ly/ZYnim4" title="http://bit.ly/ZYnim4">http://bit.ly/ZYnim4</a>) states bluntly: “Overall, the evidence we review contradicts Reinhart and Rogoff’s claim to have identified an important stylized fact, that public debt loads greater than 90 percent of GDP consistently reduce GDP growth.”</p>
<p>Some in the media gleefully reported that the error had to do with the two professors missing a column in their spreadsheet when deriving some of the summary statistics. The reality is a bit more complex and relates to how certain averages were calculated.</p>
<p>As is good practice in the world of science, the new analysis will undergo rigorous peer review. Also, Reinhart and Rogoff themselves have already reacted to the criticism, acknowledging an error but vigorously defending their overall conclusions (<a href="http://bit.ly/Zr70GC" title="http://bit.ly/Zr70GC">http://bit.ly/Zr70GC</a>).</p>
<p>Given how the blogosphere and Twitter lit up over this issue (with major news outlets jumping into the fray), it is likely that this is one academic research topic that will have caught the attention of many outside of academia.</p>
<p>Outstanding. Public policy debates surrounding the issue of government debt will be enriched by having well-informed voters pondering the evidence.</p>
<p>That is great because the stakes are so very high.</p>
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<p>Dr. Michael Reksulak teaches economics and public finance in Georgia Southern University’s College of Business Administration. He may be reached by email at <a href="mailto:mreksula@georgiasouthern.edu">mreksula@georgiasouthern.edu</a>.</p>
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http://savannahnow.com/exchange/2013-04-19/free-enterprise-when-economic-stakes-are-high#commentsExchangeColumnMICHAELREKSULAKEntertainmentContact DetailsDebt-to-GDP ratioEntertainmentGovernment debtGross domestic productHarvardhttp://bit.ly/YQtoKx.)http://www.reinhartandrogoff.comMacroeconomicsMarylandPerson Email AddressprofessorPublic economicsPublic financeUnited StatesUniversity of MarylandUniversity of MarylandSat, 20 Apr 2013 01:51:08 +0000MICHAELREKSULAK1029170 at http://savannahnow.comFree enterprise: Deterrence by the billionshttp://savannahnow.com/exchange/2012-11-17/free-enterprise-deterrence-billions
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<p>When $4.5 billion is just the beginning of the conclusion, then the phrase “record fine” is clearly appropriate.</p>
<p>According to this week’s announcement by the Department of Justice about the 2010 Deepwater Horizon oil-spill (available at: <a href="http://1.usa.gov/WarQVm" title="http://1.usa.gov/WarQVm">http://1.usa.gov/WarQVm</a>), this represents “the single largest criminal resolution” in U.S. history. </p>
<p>Moreover, the DoJ is still pursuing “civil action to recover civil penalties under the Clean Water Act and hold BP and other defendants liable for natural resource damages under the Oil Pollution Act.”</p>
<p>Analysts have estimated that further potential cost to BP from this could amount to $20 billion, not to mention the billions of dollars already paid under settlement agreements with adversely affected business and individuals.</p>
<p>Mega-settlements like this one — which won’t be in effect until approved by a judge — pose the question of whether litigation or settlement is the most efficient way to resolve such issues. There exists a voluminous economics literature on this question.</p>
<p>Much of it points to the conclusion that “the socially optimal result will normally involve a settlement rather than a trial, in that there is in principle some settlement amount such that, if the parties settle for it, trial costs will be saved without raising any other social cost,” as Harvard Law School professors Kathryn Spier and Bruce Hay write in “Litigation and Settlement” (available at: <a href="http://hvrd.me/QMe92g" title="http://hvrd.me/QMe92g">http://hvrd.me/QMe92g</a>).</p>
<p>Of course, there is also some social cost involved. Settling, rather than going through a public trial, may deprive society of the deterrence effect that public justice provides. Obviously, in the BP case this concern does not apply, given the level of public scrutiny surrounding every aspect of it.</p>
<p>That points to another part of the question of when settlements are efficient and effective. It is related to the relative bargaining power of the parties involved.</p>
<p>Widely divergent endowments with resources, as well as with information (often described as an asymmetric information scenario) may lead to detrimental outcomes. Such variation makes it more likely that one side of the settlement is browbeaten into agreeing to terms that are much more unfavorable than could likely be obtained in a court of law.</p>
<p>This becomes a problem from society’s point of view when there is no judicial approval needed for the settlement.</p>
<p>Of course, judges are humans, too, and there are economic studies that have shown clear patterns of judicial decisions that favor reduced workload through settlement over additional judicial scrutiny. This has to be considered as well.</p>
<p>Potential cons of settlement procedures are discussed in “Some thoughts about the economics of settlement” (available at <a href="http://bit.ly/XMu0Qs" title="http://bit.ly/XMu0Qs">http://bit.ly/XMu0Qs</a>) by Law professor John Bronsteen. He writes: “Trials cannot be deemed deadweight losses if they satisfy a preference for fairness, given that preference satisfaction is the economists’ own yardstick for measuring value.”</p>
<p>Bronsteen also suggests more trials would be valuable in “clarifying legal principles” — making it more likely for “potential tortfeasors to understand and comply with the law.”</p>
<p>However, none of the above-discussed limitations apply to the BP case. From an economic and free enterprise point of view it seems entirely reasonable to give a powerful company like BP the option to negotiate a settlement with an equally powerful adversary, the Justice Department.</p>
<p>In this particular instance, the resulting “record fine” also fulfills the deterrent effect our system of laws relies on so much.</p>
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<p>Dr. Michael Reksulak teaches economics and public finance in Georgia Southern University’s College of Business Administration. He may be reached by email at <a href="mailto:mreksula@georgiasouthern.edu">mreksula@georgiasouthern.edu</a>.</p>
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http://savannahnow.com/exchange/2012-11-17/free-enterprise-deterrence-billions#commentsExchangeColumnMICHAELREKSULAKDisasterBPBargaining powerBPBruce HayBusinessCompanies listed on the New York Stock ExchangeContact DetailsDeepwater HorizonDeepwater Horizon oil spillDepartment of JusticeDisasterEconomy of AlaskaEconomy of the United KingdomHarvardhttp://1.usahttp://1.usa.gov/WarQVmhttp://hvrd.me/QMe92gJohn BronsteenJudgeKathryn SpieroilPerson CareerPerson Email AddressUnited StatesUSDWatercraftSat, 17 Nov 2012 05:15:13 +0000MICHAELREKSULAK1016033 at http://savannahnow.com